Italians and the world have now been told that their economy slipped back into recession in the first half of 2014. This characterization is based on the criterion for recession that is standard in Europe and most countries: two successive quarters of negative growth. But if the criteria for determining recessions in European countries were similar to those used in the United States, this new downturn would be a continuation of the 2012 recession in Italy, not a new one. A common-sense look at the graph below suggests the same conclusion: the 2013 “recovery” is barely visible.
The ECB should further ease monetary policy. Inflation at 0.8% across the eurozone is below the target of “close to 2%.” Unemployment in most countries is still high and their economies weak. Under current conditions it is hard for the periphery countries to bring their costs the rest of the way back down to internationally competitive levels as they need to do. If inflation is below 1% euro-wide, then the periphery countries have to suffer painful deflation.
Commentators are taking note of the five-year anniversary of the fiscal stimulus that President Obama enacted during his first month in office. Those who don’t like Obama are still asking “if the fiscal stimulus was so great, why didn’t it work?” What is the appropriate response?
Those who think that the spending increases and tax cuts were the right thing to do have given a number of responses, which sound a bit weak to me. The first is that the stimulus wasn’t big enough. The second was that the Great Recession would have been much worse in the absence of the stimulus, perhaps a replay of the Great Depression of the 1930s. (The media are fond of this line of reasoning because it allows them to escape making a judgment. They can just say “nobody knows what would have happened otherwise.”) The third response is that the fiscal stimulus was short-lived, and in fact was reversed by the Congress by 2010.
Now that Janet Yellen is to be Chair of the US Federal Reserve Board, attention has turned to the candidate to succeed her as Vice Chair. Stanley Fischer would be the perfect choice. He has an ideal combination of all the desirable qualities, unique in the literal sense that nobody else has them. During his academic career, Fischer was one of the most accomplished scholars of monetary economics. Subsequently he served as Chief Economist of the World Bank, number two at the International Monetary Fund, and most recently Governor of the central bank of Israel. He was a star performer in each of these positions. I thought in 2000 he should have been made Managing Director of the IMF.
October 4 is the first Friday of the month, the day when the Bureau of Labor Statistics routinely reports the jobs numbers for the preceding month. Is the havoc created by our current political deadlock over fiscal policy showing up as job losses? We have no way of knowing. On October 1 the BLS closed for business, like many other “non-essential” parts of the government. There will be no more employment numbers until the shutdown ends.
Last week, Wall Street economic analysts responded to the usual surveys as to what they thought the upcoming employment numbers would be. (These surveys are what the media refers to each month when they tell you that employment rose or fell “more than economists expected.”) The median forecast in last week’s Bloomberg survey, for example, was a prediction that the BLS would report that “Payrolls increased by 175,000,” the biggest gain in four months. But there was no word on how many of the respondents recognized that there would in fact probably be no number at all on October 4, because the Labor Department would have been closed by the government shutdown.
This morning’s US employment report shows that July was the 34th consecutive month of job increases. Earlier in the week, the Commerce Department report showed that the 2nd quarter was the 16th consecutive quarter of positive GDP growth. Of course, the growth rates in employment and income have not been anywhere near as strong as we would like, nor as strong as they could be if we had a more intelligent fiscal policy in Washington. But the US economy is doing much better than what most other industrialized countries have been experiencing. Many European countries haven’t even recovered from the Great Recession, with GDPs currently still below their peaks of six years ago.
The recent release of a revised set of GDP statistics by Britain’s Office for National Statistics showed that growth had not quite, as previously thought, been negative for two consecutive quarters in the winter of 2011-12. The point, as it was reported, was that a UK recession (a second dip after the Great Recession of 2008-09) was nowerased from the history books — and that the Conservativegovernment would take a bit of satisfaction from this fact. But it should not.
Several of my colleagues on the Harvard faculty have recently been casualties in the cross-fire between fiscal austerians and stimulators. Economists Carmen Reinhart and Ken Rogoff have received an unbelievable amount of press attention, ever since they were discovered by three researchers at the University of Massachusetts to have made a spreadsheet error in the first of two papers that examined the statistical relationship between debt and growth. They quickly conceded their mistake.
Then historian Niall Ferguson, also of Harvard, received much flack when — asked to comment on Keynes’ famous phrase “In the long run we are all dead” — he “suggested that Keynes was perhaps indifferent to the long run because he had no children, and that he had no children because he was gay.”
The year 2013 marks the 100th anniversaries of two separate major institutional innovations in American economic policy: the Constitutional Amendment enacting the federal income tax, ratified on February 3, 1913, and the law establishing the Federal Reserve, passed in December 1913.
It took some time before the two new institutions became associated with the explicit concepts of fiscal policy and monetary policy, respectively. It wasn’t until after the experience of the 1930s that they came to be viewed as potential instruments for managing the macro-economy. John Maynard Keynes, of course, pointed out the advantages of expansionary fiscal policy in circumstances like the Great Depression. Milton Friedman blamed the Depression on the Fed for allowing the money supply to fall. [Tools of fiscal policy used by governments, in addition to tax rates and tax deductions, are spending and transfers. Tools of monetary policy used by central banks include interest rates, quantities of money and credit, and instruments such as reserve requirements and foreign exchange intervention used in various (non-US) countries.]
A survey of economists is published in the November 2012 issue of Foreign Policy. One question was whether we thought that the US unemployment rate would dip below 8.0% before the election. When the FP conducted the poll at the end of the summer, unemployment was 8.1-8.2%. Now it’s 7.8%. Only 8% of the respondents said “yes.” (I was one. I basically just extrapolated the trend of the last two years.)
My fellow economists choose defense spending and agricultural subsidies as the two categories of US federal budget that they think the best to cut. They rate the euro crisis as the greatest threat to the world economy now and are particularly worried about Spain.